What happens if a developer in Spain goes bankrupt during construction?

Buying property from a developer in Spain often means choosing a modern apartment, an attractive location, a terrace, a pool and the option of spreading payments over time. For many clients from Poland the new-build market is very convenient, because apartments are often handed over to a high standard, with a fitted kitchen, bathrooms, air conditioning and communal areas.

But when buying a property under construction, one important question arises:

what happens if the developer goes bankrupt or fails to complete the development?

That is a very reasonable concern. When buying off-plan, the buyer pays part of the money before the property is finished. That is why the documents, the guarantees, the account the funds are paid into and independent legal support are so important.

This article explains what risks can arise when buying property from a developer in Spain, what a bank guarantee is, which documents the buyer should receive and what to check before paying any money.

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Table of contents

1. Is developer insolvency in Spain a real risk?
2. Why does this issue particularly affect the new-build market?
3. What happens to the buyer's money once paid?
4. What is a bank guarantee on an off-plan purchase?
5. What documents should the buyer receive?
6. What should you check before signing the contract with the developer?
7. What happens if construction is delayed?
8. What should you do if the developer has financial problems?
9. The role of the lawyer when buying from a developer.
10. What do we advise our clients?
11. FAQ.
12. Summary.

Key points at a glance

Question	Answer
Is developer insolvency possible?	As in any industry. It is not an everyday occurrence, but with off-plan purchases you have to allow for the risk.
Should the money you pay be secured?	Yes. When buying apartments under construction, the money paid by buyers should be properly secured in line with Spanish regulations.
What is a bank guarantee?	This secures the refund of money paid if construction does not start or is not completed by the agreed date.
Is the developer alone enough?	No. Before the contract is signed, the documents should be checked by an independent lawyer acting for the buyer.
What matters most before paying any money?	Verification of the developer, the building permit, the contract, the payment schedule, the guarantees and the account the funds are to be paid into.

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1. Is developer insolvency in Spain a real risk?

Yes, developer insolvency is a real risk, just as it is in any country and in any industry where large developments are built. That does not mean, however, that buying from a developer in Spain is inherently dangerous.

The Spanish new-build market is popular with foreign clients because it gives access to new developments, modern communal areas, energy-efficient solutions and often a very high standard of finish. Many people choose to buy during construction because they can pick a better layout, floor or view, or pay a lower price than after completion.

The risk arises when the buyer focuses solely on visualisations, price and location and ignores the formalities.

A developer can run into financial trouble for various reasons: rising construction costs, delays, financing difficulties, administrative problems, a land dispute or weaker sales than expected. Not every problem means immediate insolvency, but every one should be taken seriously.

That is why, when buying from a developer, the most important question is not "does the development look beautiful?" but:

is the buyer's money properly secured, and have the development's documents been checked?

If so, the risk can be reduced significantly. If not, even the most attractive offer may turn out to be too risky.

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2. Why does this issue particularly affect the new-build market?

A developer's insolvency matters particularly in the new-build market, because buyers often pay money before the property physically exists or before it has been completed.

Resale is a different situation. The buyer sees a finished property and can view it and check its condition, documents, owner and any encumbrances. There are risks there too, of course, but the property is already built.

With new builds, especially off-plan, the client is buying the promise of a future property.

This means the decision rests on:

• designs,
• the development plan,
• the visualisations,
• the construction schedule,
• the contract with the developer,
• the permits,
• guarantees,
• the developer's reputation,
• the security for the funds paid.

There is nothing wrong with that. Buying off-plan can be very advantageous. It often gives a wider choice of units, the option of spreading payments and access to developments that will be worth more once completed.

But it demands greater formal discipline.

The buyer should know exactly:

• who the developer is,
• whether the development has the required permits,
• what stage construction has reached,
• what the payment schedule is,
• whether the payments are secured,
• what will happen in the event of a delay,
• what will happen if construction is not completed,
• what rights the buyer has.

With new builds you cannot simply trust the sales brochure. The brochure shows what the development is meant to look like. The documents show whether the purchase is safe.

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3. What happens to the buyer's money once paid?

This is one of the most important questions when buying from a developer.

In Spain, money paid by buyers towards the construction of apartments should be properly secured. With off-plan purchases the developer should not be free to accept money and mix it with the company's other funds.

Under buyer-protection rules, sums paid in advance should go into a dedicated account and be secured by a guarantee, such as a bank guarantee or insurance. The purpose of this security is to protect the buyer if construction does not start or is not completed by the agreed date.

In practice this means that before paying any money you need to check not only the price and the schedule but also which account the funds go into and whether the buyer receives a document confirming that the payment is secured.

The buyer should avoid a situation where:

• the money is to go into the developer's ordinary operating account,
• there is no guarantee document,
• the developer says the guarantee will come "later",
• the contract does not say what happens in the event of a delay or non-completion,
• the payment schedule is unclear,
• the account for the transfer does not match the documents.

The mere statement that "it's a well-known developer" is not enough. A well-known developer must also follow procedures and give the buyer the appropriate documents.

The safest scenario is one in which every payment is clearly described in the contract, goes into the right account and is covered by appropriate security.

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4. What is a bank guarantee on an off-plan purchase?

A bank guarantee on an off-plan purchase is one of the buyer's most important safeguards.

Its purpose is to protect the money the buyer has paid towards a property that is still under construction. If the development does not start or is not completed by the agreed date, the guarantee may allow the buyer to recover the money paid, together with any interest due, in line with the terms set out in the documents and regulations.

In practice, the guarantee may take the form of:

• a bank guarantee,
• insurance securing the refund of payments.

Above all, do not settle for a general assurance that "payments are safe". The buyer should receive a specific document.

What should a guarantee contain?

The lawyer should verify, among other things:

• who issues the guarantee,
• which development it relates to,
• which unit it relates to,
• how much is secured,
• whether it covers all of the buyer's payments,
• when it can be claimed,
• whether it covers interest,
• what conditions must be met to claim a refund,
• whether the document is individual or general.

This is very important, because merely being told a guarantee exists is not enough. What matters is what it says.

General versus individual guarantee

The buyer should be especially wary where the developer talks about the development being secured in general terms but does not provide a document covering that particular buyer and that particular unit.

It is safest if the guarantee clearly states the sums paid by that particular buyer and the property it relates to.

For a transaction this large, verbal assurances are not worth relying on. The guarantee must come from a document.

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5. What documents should the buyer receive?

The range of documents depends on the particular development, the region and the stage of construction, but when buying from a developer the buyer should receive and verify several basic items.

What matters most is that the documents are available before key financial decisions are made, not only after the money has been paid.

Documents relating to the developer

The buyer should know exactly who the other party to the transaction is. Check the developer's details, their status, their registration details and whether they are actually the entity responsible for the development.

It is worth verifying:

• the company name,
• registration details,
• the persons authorised to represent the company,
• track record,
• previous projects,
• reviews of developments,
• information about any legal or financial problems.

Documents relating to the development

With new builds, the documents confirming that the development can legally proceed are key.

Depending on the stage, you should check, among other things:

• building permit,
• documents relating to the land,
• the project of the development,
• the technical description,
• the specification of the standard,
• the works schedule,
• the expected completion date,
• the handover terms,
• information about the communal areas.

Documents relating to the unit

The buyer should receive clear information about the specific unit, not just a general brochure for the development.

It is worth checking:

• the unit number,
• the floor,
• the floor area,
• the layout of the rooms,
• the area of the terrace or garden,
• a parking space,
• the storage room,
• the orientation relative to the points of the compass,
• the view,
• what exactly the price covers.

Documents relating to payments and guarantees

This is absolutely the key part.

The buyer should receive:

• the reservation or preliminary contract,
• payment schedule,
• the account details for payments,
• the bank guarantee or insurance document,
• the terms for refunding your money,
• the rules that apply in the event of a delay,
• information on the consequences of withdrawing.

If any of these points is unclear, do not ignore it. When buying from a developer, documents matter more than speed of decision.

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6. What should you check before signing the contract with the developer?

Before signing the contract with the developer you need to check both the development itself and the terms of the transaction.

This is a stage where emotions should take a back seat. The apartment may look perfect, but signing a contract without verifying the documents is a risk that can be avoided.

Check the developer

It is worth verifying whether the developer has experience, has completed earlier developments and whether its business is transparent.

Good questions to ask are:

• which developments the developer has already completed?
• can they be viewed?
• were they handed over on time?
• whether clients have reported significant problems.
• whether the company has traded under the same name for years,
• whether the details in the contract match the registration details?

Check the permits

The building permit is hugely important. The buyer should know whether the development has the required approvals and what stage of the administrative process it has reached.

If the developer wants to take large payments but does not show documents relating to the permit, that is a warning sign.

Check the payment schedule

The schedule should be clear, logical and tied to the stages of the process.

The buyer should know:

• how much you pay on reservation,
• when the next instalments are due,
• how much remains for the notarial deed,
• whether payments are tied to construction stages,
• what will happen in the event of a delay,
• what will happen if the buyer does not obtain financing.

Check the finish specification

Visualisations are not a contract. You need to check the specification.

It is worth establishing:

• whether the kitchen is included in the price,
• whether appliances are included in the price,
• whether air conditioning is installed,
• what materials will be used,
• whether the bathrooms are complete,
• whether wardrobes are included in the price,
• whether the parking space is included in the price,
• whether the storage room is included in the price,
• what options there are for buyer-requested changes.

Check the withdrawal and delay terms

The contract should state clearly what happens if the developer misses the deadline.

A general statement that "the deadline may change" is not enough. The buyer should know what rights they have, when they can demand their money back and which procedures apply.

Check the account for payments

The account number should match the documents and be confirmed through an independent channel. Never make transfers on the strength of an unverified email or verbal instruction.

When buying property, the greatest damage is often caused not by the price itself but by carelessness when transferring money.

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7. What happens if construction is delayed?

A construction delay does not always mean the developer has financial problems. In practice developments can slip for many reasons: administrative, technical, weather-related, logistical or linked to materials deliveries.

What matters, though, is how the delay is described in the contract and how the developer communicates with buyers.

A minor delay

Minor shifts in deadlines can happen, especially with larger developments. Good communication from the developer, visible progress on site and a clear explanation of the reasons for the delay usually help keep things calm.

Even so, the buyer should keep a record of all the arrangements.

A serious delay

The situation is different when construction stops for many months, the developer stops responding, the site is empty and deadlines are pushed back with no concrete explanation.

In that case, consult a lawyer and check what rights arise under the contract and the guarantees.

What should the buyer do?

In the event of a delay, it is worth:

• ask for an official explanation,
• obtain the current schedule,
• check the progress of the works,
• keeping all communication,
• have the contract reviewed by a lawyer,
• checking whether you can claim on the guarantee,
• not signing addenda without legal analysis.

Be especially careful with addenda that extend the completion date. Signing them can sometimes affect the buyer's rights, so you need to understand the consequences before accepting any changes.

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8. What should you do if the developer has financial problems?

If reports emerge that a developer has financial problems, the worst response is panic. The second worst is ignoring the situation.

You need to act calmly but quickly.

Step 1: Gather the documents

The buyer should collect all the documents relating to the transaction:

• the reservation contract,
• the preliminary contract,
• proof of bank transfers,
• a bank or insurance guarantee,
• correspondence with the developer,
• payment schedule,
• documents relating to the development,
• addenda,
• sales materials.

Without the documents, it will be harder for the lawyer to assess the situation.

Step 2: Contact a lawyer

The lawyer should check what rights arise under the contract, whether a refund can be demanded, whether the guarantee can be called on and what steps to take.

It is not worth acting on advice from internet forums. Every case depends on the specific documents.

Step 3: Do not sign any new documents without analysis

If the developer proposes an addendum, a change to the schedule, a new deadline or any other solution, you need to check that it does not leave the buyer worse off.

Signing an addendum can sometimes mean agreeing to new terms.

Step 4: Check the guarantee

If the buyer has received a bank or insurance guarantee, you need to analyse when and how it can be claimed.

It is important to have:

• who issued the guarantee,
• which sums it covers,
• which documents are needed,
• how long it remains valid,
• whether it covers interest,
• what procedure has been specified.

Step 5: Find out whether the development has a chance of being completed

Not every financial problem means a development will collapse. Sometimes it is possible to finish construction, bring in new financing or have another entity take over the project.

Even so, the buyer should base decisions on documents and a lawyer's opinion, not on hope.

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9. The role of the lawyer when buying from a developer

When buying off-plan, a lawyer is one of the most important safeguards.

An agency can help you find a property, explain the process, arrange contact with the developer and guide you through the subsequent stages. A lawyer, on the other hand, should check the documents and protect the buyer's interests from the formal side.

These are two different roles.

What should the lawyer check?

When you buy from a developer, the lawyer should verify, among other things:

• developer's details,
• title to the land,
• building permit,
• the contents of the contract,
• payment schedule,
• the payment account,
• a bank or insurance guarantee,
• the withdrawal terms,
• the consequences of delay,
• standard of finish,
• documents relating to the development,
• whether the unit matches the offer.

The lawyer should also explain to the buyer exactly what they are signing and what each clause means.

Why should the lawyer be independent?

The buyer should be certain that the lawyer is acting on their side.

This is not about distrusting the developer or the agency. It is about the security of the transaction. When buying property, every party in the process has a role, and the buyer should have someone who protects their interests specifically.

When should you contact a lawyer?

Ideally before signing documents and before paying any larger sums.

A common mistake is that the buyer contacts a lawyer only once a problem has already arisen. Yet a lawyer's most important role is to prevent problems, not only to solve them.

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10. What do we advise our clients?

Our most important piece of advice: buying from a developer in Spain can be an excellent choice, but only if the process is run in an orderly way.

It is not enough to pick a beautiful apartment. You need to check the developer, the documents, the permits, the contract, the payment schedule and the security for the money you pay.

We always recommend that clients ask themselves a few questions before buying:

• Do I know who the developer is?
• Does the development have the required permits?
• Have I seen the documents for the unit?
• Do I understand the payment schedule?
• Do I know which account I am paying the money into?
• Will I receive a bank or insurance guarantee?
• Has a lawyer checked the contract?
• Do I know what will happen in the event of a delay?
• Do I understand exactly what the price covers?

If the answer to any of these questions is "I don't know", it is worth stopping.

Buying a property under construction requires trust, but it cannot rely on trust alone. It has to rely on documents.

At Aria Spain we help clients through this process calmly: from choosing a development, through liaising with the developer, explaining costs and working with lawyers, to the later stages of the purchase.

Our aim is not simply to show you a new apartment. Our aim is to help you buy a property that suits your needs and is sound from a formal point of view.

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11. FAQ

Is buying off-plan in Spain safe?

Yes, it can be safe, provided the development, the developer, the documents, the payment schedule and the guarantees are all carefully checked before any money is paid.

What does buying off-plan mean?

Buying off-plan means buying a property that is still under construction or has yet to be built. The buyer makes the decision on the basis of a design, plans, visualisations, documents and the contract with the developer.

Does the developer have to secure the money paid?

When buying apartments under construction, the money paid by buyers should be properly secured in line with Spanish regulations. In practice this may be a bank guarantee or insurance.

What is a bank guarantee?

A bank guarantee is a document securing the refund of money paid by the buyer if construction does not start or is not completed by the agreed date, in line with the terms of the guarantee and the contract.

Does the bank guarantee cover all payments?

This has to be checked in the document. The lawyer should verify what amount the guarantee covers, whether it applies to that particular buyer and that particular unit, and what conditions must be met to claim on it.

What to do if construction is delayed?

Ask the developer for an official explanation, check the current schedule, keep all correspondence and have a lawyer review the contract. Do not sign any addenda without legal analysis.

Does a construction delay mean the developer is insolvent?

No. A delay can have many causes and does not always signal a serious financial problem. It is still worth checking the situation, especially if the delay is long, communication is poor and work on site has stopped.

Can you get your money back if the developer does not complete the development?

This may be possible if the payments were properly secured and the terms of the contract and guarantee cover such a situation. A lawyer should assess the specific case.

Is it enough to trust a well-known developer?

No. A developer's good reputation matters, but it is no substitute for documents. Even with a well-known developer you must check the contract, the permits, the guarantees and the account for payments.

When is it best to contact a lawyer?

Ideally before signing the contract and before paying any larger sums. A lawyer should help prevent problems before the buyer takes on a financial commitment.

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12. Summary

A developer's insolvency in Spain should not automatically put you off buying a new-build property. It is, however, a risk you need to take into account knowingly.

Buying off-plan can be very advantageous. It gives access to new developments, better layouts, attractive locations and the option of spreading payments over time. But it requires checking the documents and securing your payments.

The most important points are:

• the developer's credibility,
• building permit,
• a clear contract,
• a safe payment schedule,
• the correct account for payments,
• bank or insurance guarantee,
• an independent lawyer,
• making decisions calmly.

When buying a property under construction, the point is not to be afraid. It is not to act blindly.

If you are planning to buy an apartment or house from a developer in Spain and want to get safely through the whole process, contact Aria Spain. We will help you choose a proven development, understand the stages of the purchase and make sure your decision is not only exciting but, above all, well prepared.

The protection of sums paid up front when buying a property under construction derives, among other things, from Disposición Adicional Primera of Ley 38/1999 de Ordenación de la Edificación. The provision requires repayment of the deposits to be secured by a bank guarantee or by seguro de caución insurance, on the terms it sets out.

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